Historical Interest Rate Cut: Fed's Surprise Move?

There is an old Chinese saying, "When the storm is about to come, the wind fills the tower," which aptly describes the moment when the People's Bank of China announced a rate cut on October 21, 2024. The news of the rate cut instantly ignited heated market discussions, with people speculating about the profound implications behind this move and how it would affect our economic life.

In fact, the rate cut is not an isolated policy decision; it is supported by a complex domestic and international economic situation. Just a few days before the rate cut, on October 18, the China Securities Regulatory Commission released a series of important news that significantly raised foreign capital's expectations for China's economic growth. The international capital market is always keenly aware, and it seems to have already sensed that China's economy is about to usher in a new round of transformation.

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Looking globally, on September 19, the Federal Reserve lowered interest rates by 50 basis points, a move that had a profound impact on global capital flows. The US dollar, as the global reserve currency, its interest rate changes directly affect the direction of global capital. The Federal Reserve's rate cut means that the attractiveness of US dollar assets has decreased, and capital begins to seek new safe havens. This presents both opportunities and challenges for emerging market countries like China.

Since joining the World Trade Organization, China has deeply integrated into the global economic system and has become the world's second-largest economy. Such a position has allowed us to enjoy the dividends brought by globalization and has also made us the focus of international attention. Especially the United States, as the world's largest economy, has always regarded China as a potential competitor and has continuously tried to contain China's development through various means.

When it comes to US economic strategy, we must mention a key word - interest rate hikes. Starting from 2022, the US has raised interest rates multiple times to address domestic economic issues, attempting to prevent capital outflows by increasing interest rates and exerting pressure on emerging market countries like China. However, this strategy has not achieved the expected results and has instead put the US economy in an even more embarrassing situation.

If the Federal Reserve chooses to cut interest rates now, a large amount of US dollars may flow out of the United States, triggering a financial crisis; and if it continues to raise interest rates, the US fiscal deficit will become more severe, and the economic burden will further increase. According to the latest data, the US fiscal deficit in 2024 has reached as high as 1.83 trillion US dollars, and interest expenditure has exceeded the trillion-dollar mark for the first time. Such a fiscal situation has put the US economic policy in a dilemma.

Turning our attention back to China, our economy is also facing significant challenges. The rate cut is a positive signal, but relying solely on the rate cut is not enough to drive a comprehensive economic recovery. The recovery of market confidence requires time and efforts from multiple aspects. Currently, China's economy is facing a series of issues such as industrial structure imbalance, coexistence of internal inflation and external deflation, and these issues have had a significant impact on economic growth.

The government has also introduced a series of measures to address these challenges, but the results have not been satisfactory. The room for monetary policy operations has become increasingly narrow. How to maintain stable economic growth while effectively controlling the risks of inflation and deflation has become a difficult problem in front of us.

At this time, the role of the stock market has become particularly important. The original intention of establishing the stock market was to help state-owned enterprises out of difficulties, which was fully reflected in the 2005 bull market. The bull market at that time promoted the process of market-oriented reform, allowed state-owned shares to be smoothly sold, and provided financial support for the transformation and upgrading of state-owned enterprises.

Today, China is in a difficult stage of modernization construction, and the stock market remains the core platform for financing and enhancing market confidence. The government is promoting the stock market to warm up through interest rate cuts, hoping to stimulate investors' enthusiasm, improve the market's financing situation, and inject new vitality into economic development.However, we must also be keenly aware that economic development is not always smooth sailing. Currently, we may be facing the risk of stagflation, and traditional monetary and fiscal policies may no longer be able to fully address the issues. Finding new drivers of economic growth has become a challenge we must confront.

At the same time, we must also recognize the immense potential of China's economy. As the world's second-largest economy, we possess a vast market scale and abundant resource reserves, which are our greatest confidence in facing various challenges. Future economic policies need to find a balance between stability and development, maintaining steady economic growth while effectively preventing various risks.

This interest rate cut can be seen as a timely adjustment of policy tools and a reflection of our self-positioning and response strategies in the international financial environment. It tells us that in the face of complex and changing domestic and international economic situations, we need to maintain our composure and firm confidence, and promote economic development through continuous reform and innovation. Only in this way can we remain invincible in fierce international competition and achieve the great rejuvenation of the Chinese nation.